Chapter-7

ESTIMATING COSTS of FARM MACHINERY

 Farm power, machinery and equipment are major cost
items in agriculture.
 Larger machines, new technology, higher prices for parts
and new machinery, and higher energy prices have caused
machinery and power costs to rise in recent years.
 However, good managers can control machinery and
power costs per hectare.
 Making smart decisions about how to acquire machinery,
when to trade, and how much capacity to invest in can
reduce machinery costs as much as per acre.
 All these decisions require accurate estimates of the costs of
owning and operating farm machinery.
7.1. Machinery Costs
 Farm machinery costs can be divided into two
categories:
 Ownership costs i.e. Fixed cost, which occur
regardless of machine use.
 Operating costs, which vary directly with the
amount of machine use.
 The true value of some of these costs is not
known until the machine is sold or worn out. But
the costs can be estimated by making a few
assumptions about machine life, annual use, and
fuel and labour prices.
1. Ownership costs or Fixed cost
 Ownership costs (also called fixed costs)
include:
depreciation,
interest (opportunity cost),
Taxes and insurance
housing facilities
 a. Depreciation
 Depreciation is a cost resulting from wear,
obsolescence, and age of a machine.
 The degree of mechanical wear may cause the
value of a particular machine to be somewhat
above or below the average value for similar machines
when it is traded or sold.
 The introduction of new technology or a major design
change may make an older machine suddenly obsolete,
causing a sharp decline in its remaining value.
 But age and accumulated hours of use usually are the
most important factors in determining the remaining
value of a machine.
 Before an estimate of annual depreciation can be
calculated, an economic life for the machine
and a salvage value at the end of the economic
life must be specified.
 The economic life of a machine is the number of
years for which costs are to be estimated.
 Salvage value is an estimate of the sale value of
the machine at the end of its economic life.
 It is the amount you could expect to receive as a trade-
in allowance, an estimate of the used market value if
you expect to sell the machine outright, or zero if you
plan to keep the machine until it is worn out.
 Where: Salvage value (SV) is 10 % purchase price (PP) of the
machine

 Example-1: A 180-PTO horsepower diesel tractor with a list price

of $200,000. Dealer discounts are assumed to reduce the actual
purchase price to $180,000. An economic life of 15 years is selected.
The tractor is expected to be used 400 hours per year.
 Solution: For the 180-hp tractor with 400 hours of annual use in
the example, the salvage value after 15 years is estimated as
10%t of the new list price:
Salvage value = current list price x 10%
=$200,000 x 10% = $20,000
Depriciation = (PP-SV) / age = ($200,000 - $20,000) / 15 year
= 12000 / year
b. Interest
 If the operator borrows money to buy a machine, the lender
will determine the interest rate to charge.
 But if the farmer uses his or her own capital, the rate will
depend on the opportunity cost for that capital elsewhere in
the farm business.
 only part of the money is borrowed, an average of the two rates
should be used. For the example we will assume an average
interest rate (i) of 8-10 percent.
 c.Taxes and Insurance
 This cost usually is much smaller than depreciation and
interest, but they need to be considered.
 A cost estimate equal to 1% of the purchase price often is
used.
• Taxes and Insurance cost = 1% PP = 0.01 x PP
d.Housing
 Providing shelter, tools, and maintenance equipment for
machinery will result in fewer repairs in the field and
less deterioration of mechanical parts and appearance
from weathering.
 That should produce greater reliability in the field and a
higher trade-in value.
 An estimated charge of 1.0 percent of the purchase
price is suggested for housing costs.
 Taxes and Insurance cost = 1% PP
= 0.01 x PP
Total Ownership Cost (Fixed Cost)
 The estimated costs of depreciation, interest, taxes,
insurance, and housing are added together to find the total
ownership cost.
Total ownership cost = depreciation cost + interest cost
+ taxes and insurances + housing cost
 If the tractor/Machinery is used for some hours per year,
the total ownership cost per hour is:
2. Operating costs ( Variable cost)
 Operating costs (also called variable costs) include:
• repairs and maintenance cost
• fuel cost
• lubrication cost
• Operator labour cost
i. Repairs and Maintenance
 Repair costs occur because of routine maintenance, wear
and tear, and accidents.
 Repair costs for a particular type of machine vary widely from
one geographic region to another because of soil type, rocks,
terrain, climate, and other conditions.
 Within a local area, repair costs vary from farm to farm
because of different management policies and operator skill.
 The best data for estimating repair costs are the
operator’s own records of past repair expenses.
 Good records indicate whether a machine has had
above or below average repair costs and when
major overhauls may be needed.
 They also will provide information about the
operator’s maintenance program and mechanical
ability.
 Without such data, repair costs must be
estimated 5-8 percent of purchase price of
tractor/power tiller per year.
 ii. Fuel
 Fuel costs can be estimated by using average fuel
consumption for field operations in liters per hour.
 Those figures can be multiplied by the fuel cost per
litre to calculate the average fuel cost per
hour/hectare.
 Fuel cost (birr) = Quantity of fuel consumed per hour (Lit per
hour) x Cost of fuel (birr/lit)
 iii. Lubrication
 Surveys indicate that total lubrication costs on most
farms average about 15 percent of fuel costs.
 Therefore, once the fuel cost per hour has been
estimated, it can be multiplied by 0.15 to estimate total
lubrication costs.

Lubrication cost (birr) = Quantity of lubrication consumed

per hour (Lit per hour) x Cost of lubrication (birr/lit)

or

Lubrication cost (birr) = 0.15 x Fuel cost (birr)

 iv.Labour
 Because different size machines require different quantities of
labour to accomplish such tasks as planting or harvesting, it
is important to consider labour costs in machinery analysis.
 Labour cost also is an important consideration in comparing
ownership to custom hiring.
 Actual hours of labour usually exceed field machine time by 10
to 20 percent, because of travel time and the time required
to lubricate and service machines.
 Consequently, labour costs can be estimated by multiplying
the labour wage rate times 1.1 or 1.2.
 Total Operating Cost
 Repair, fuel, lubrication, and labor costs are added to
calculate total operating cost.
Total operating cost = Repair cost + fuel cost +
lubrication cost + labor cost
Total Cost
Total Cost = total ownership cost + operating
 After all costs have been estimated, the total
ownership cost per hour can be added to the
operating cost per hour to calculate total cost per
hour to own and operate the machine.
 Total Cost per hour = total ownership cost per hour + operating
cost per hour